Mutual funds are group money funds where people pool their assets to access investment opportunities. There are two main types of mutual funds: mutual funds and exchange-traded funds (ETFs). Globally, mutual funds represent approximately $26 trillion USD in value. Different types of mutual funds have their own approach and strategy, with varying levels of risk and potential reward. ETFs are publicly traded on the stock market and help diversify portfolios.
Mutual funds, also known as collective investment schemes or managed funds, are group money funds where people pool their assets to enable them to access investment opportunities that would not otherwise be available to them. Since many investments have minimum purchases, often a single buyer at the consumer level would not be able to purchase even the minimum amount, but by pooling funds together with many other investors, money can be invested and profits or losses shared among the group. Since investments can also have costs associated with them, mutual funds allow these costs to be reduced by being spread out among many people, rather than being borne by each individual. There are two main types of mutual funds in the United States: mutual funds and exchange-traded funds (ETFs).
Mutual funds are the backbone of the collective investment scheme in both the United States and Canada, although the term is generally referred to in other parts of the world to refer simply to all types of investment funds. Mutual funds take money from the collective group and pool it to invest in securities like stocks and bonds. Mutual funds are managed by a fund manager, who manages all the money in the fund, choosing the investments themselves, usually based on certain criteria.
Globally, mutual funds make up a huge block of investment capital, representing approximately $26 trillion US dollars (USD) in value. As their value has grown in recent years, fund managers have become some of the highest paid people on the planet, with the most successful fund managers earning billions of dollars annually. There are many different types of mutual funds, each with their own approach and strategy.
Growth mutual funds, for example, assume a growing market, buying low and selling high, and can produce sizeable returns. Your investment objective is not to receive dividends, so your short-term performance is not optimal. They do very well in bull markets, outperforming the S&P during these times, but conversely they can be hit hard during bear markets. For this reason, they carry a fair amount of risk, as well as potential reward, making them not ideal for risk-averse investors. Aggressive growth funds are a subclass of aggressive funds, but they may borrow funds or trade stock options to further leverage the money held in the fund.
At the other end of the spectrum, growth income mutual funds are fairly conservative, specializing in blue-chip stocks. They buy things like Dow Industrials, Utilities, and other stocks that are generally not volatile. Investing in a growth income fund is similar to investing conservatively in the stock market directly, but with the benefits of pooling resources under a fund manager.
An exchange-traded fund (ETF) is similar to a mutual fund in that it is a vehicle for holding other securities, but it is publicly traded on the stock market, just like a stock itself. You can invest in an ETF as if you were buying a stock, but instead you are buying a collection of stocks and bonds, which helps immediately diversify your portfolio.
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